Jefferson Smurfit shares have been tipped as having the best potential for appreciation this year (1998) among the larger Irish companies by Davy Stockbrokers. And Goodbody is recommending that investors should be overweight in the shares.

Smurfit shares had risen by more than 40 per cent in 1997 before the crisis in the Far East which knocked the shares back sharply. Investors sold on the basis that an economic slump in Asia would hit the paper and packaging sector hard.

However, there are some reasons why the response to the problems in the Far East could have been overdone in the case of Smurfit. While there is some concern that a fall in demand in the Asian markets could have a dampening effect on paper and packaging prices, there was increasing evidence towards the end of the year that prices in the more important US market are on the way up.

Price rises already announced appear to have stuck and producers are confident that they will be able to implement further price rises. These prices rises have been made possible by discipline among the producers in the US.

Over-production in the past led to severe oversupply and consequent falls in prices to levels where even the high-fixed production costs in the industry were not covered. With fixed costs covered, rising prices feed virtually straight into profits.

Brokers expect Smurfit earnings to benefit significantly from these price increases over the next few years. In addition the company is expected to move sooner rather than later to restructure in the US market. A full review of the US operation has been completed and divestments are expected when suitable investment opportunities are negotiated. This restructuring will be aimed at squeezing more out of assets to boost earnings.

Overall, barring further market shocks, the fundamentals appear largely positive for the group this year.